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Some would use
Hurricane Katrina, and the great expense of recovery efforts, as
justification for letting the President's tax cuts expire. But
while the fiscal impact of Katrina on federal spending is already
setting records, national emergencies are the worst time to
increase taxes. Indeed, if federal taxes are unexpectedly
increased, the business climate and labor markets will be even more
battered than they are now. In contrast, making the President's tax
cuts permanent now would create 430,000 additional jobs in 2006
alone and an average of 624,000 jobs per year over the next decade.
In local terms, making the tax cuts permanent would annually create
5,300 additional jobs in Mississippi and 9,100 additional jobs in
Louisiana-about one-third of those in New Orleans. To pay for
Katrina recovery efforts, Congress should prioritize spending
programs and make cuts instead of raising taxes, which would only
further damage the Gulf Coast and national economy.

Deep Impact

"[A]nnihilation in New Orleans is an
irrefutable sign that the national tax-cut party is over,"
editorialized the New York Times on September 3, just as the
extent of the damage to the Gulf Coast was becoming known.[1]
Those who see every event as an opportunity to indict President
George W. Bush's tax cuts were quick to employ Katrina. "This is a
hell of a time to be thinking of cutting taxes, especially on stock
dividends and capital gains,'' said Rep Charles Rangel (D-NY),
ranking member on the House Ways and Means Committee.[2]

The anti-tax cut
message is not just about fiscal deficits. Rather than see Katrina
as an act of nature, some pundits shamelessly blame the tax cuts
for "bloated corpses float[ing] down the boulevards of a historic
city."[3]

How would repeal
of the 2003 tax cuts affect the national economy? Americans know
the storm's economic impact was severe just by its impact on
gasoline prices, but the main concern now is about jobs. Recent
measures show that new jobless claims spiked to 398,000 following
the hurricane-an increase of 22 percent in just one week.

Economists are
uncertain about the severity of Katrina's damage on the economy.
New Orleans is a vital port and transportation hub, and it was a
center for oil refining. Fortunately, New Orleans is not entirely
destroyed, and many areas will be back in business in weeks, not
months. Nationally, however, the fundamental reduction of aggregate
supply, mixed with government-back increase in aggregate demand
means that generally higher inflation over the next year is a sure
thing. In terms of employment, the migration of people is more
likely to create a boom than a burden in cities where those
displaced from the Gulf Coast settle-consider, for example, the
prospect of a hundred thousand new customers on restaurants in
Texas.

A Choice: To
Contract or Expand?

The enduring
lesson of the Great Depression is that economic policy should not
be contractionary in the face of a contraction. That fundamental
rule is adhered to by neoclassical economists and is also one of
the sacred commandments of Keynesians-a rare point of agreement
between the two groups. So it was rather bizarre, and likely driven
by partisanship more than economic thinking, to hear Sen. Hillary
Clinton (D-NY) say that "...[rebuilding New Orleans] comes from the
first instance in not making those tax cuts for rich people like us
permanent."[4]

The Heritage
Foundation projected that the passage of the Jobs and Growth Tax Relief Reconciliation Act
(JGTRRA) of 2003 would create millions of additional jobs above and
beyond what the economy would generate normally. These projections
were driven by the strong expansionary components of the
bill.

JGTRRA accelerated the phase-in of incentives
to work and invest from the President's 2001 tax cuts, while also
providing major new incentives:

Lower tax rates on personal income for all taxpayers. The
top marginal tax rate was reduced from 39.6 percent to 35 percent,
and a 10-percent bracket was introduced.

Lower taxes on business investment, including a much lower
tax rate, 15 percent, on dividends and on long-term capital gains.
Equally important, JGTRRA allowed businesses to more quickly deduct
the expenses of their investments in machinery, computers, and
software.

An increased child tax credit, from $500 to $1,000 per
child.

The end of the marriage penalty. Married couples no longer
pay higher taxes than equivalent singles, which eliminates a
perverse incentive against families.

A phased-in repeal of the estate tax.

In fact, five million more Americans were
employed in August 2005 than in May 2003, when President
George W. Bush signed the tax cuts into law. Recoveries normally
create jobs anyway, but lower taxes increased incentives to work
and incentives to hire more workers.

Making the Bush
tax cuts permanent would create 430,000 additional jobs nationally
in 2006 alone and an average of 624,000 per year over the next
decade, according to our macroeconomic modeling. These numbers
include 5,300 additional jobs in Mississippi and 9,100 additional
jobs in Louisiana annually-one-third of those in New Orleans-just
due to making the tax cuts permanent.

Congress now has a
very tough political decision: whether to make the 2003 tax cuts
permanent, to let them to phase out as scheduled, or to repeal them
promptly in order to help "pay for" Katrina. There is an
alternative to taxing more, and that is spending less. It may be
tough politically, but re-prioritizing spending and limiting its
future growth is the only way to change fiscal policy without
harming the economy. Spending discipline is the path to making tax
cuts permanent and creating more jobs.

Some would use
Hurricane Katrina, and the great expense of recovery efforts, as
justification for letting the President's tax cuts expire. But
while the fiscal impact of Katrina on federal spending is already
setting records, national emergencies are the worst time to
increase taxes. Indeed, if federal taxes are unexpectedly
increased, the business climate and labor markets will be even more
battered than they are now. In contrast, making the President's tax
cuts permanent now would create 430,000 additional jobs in 2006
alone and an average of 624,000 jobs per year over the next decade.
In local terms, making the tax cuts permanent would annually create
5,300 additional jobs in Mississippi and 9,100 additional jobs in
Louisiana-about one-third of those in New Orleans. To pay for
Katrina recovery efforts, Congress should prioritize spending
programs and make cuts instead of raising taxes, which would only
further damage the Gulf Coast and national economy.

Deep Impact

"[A]nnihilation in New Orleans is an
irrefutable sign that the national tax-cut party is over,"
editorialized the New York Times on September 3, just as the
extent of the damage to the Gulf Coast was becoming known.[1]
Those who see every event as an opportunity to indict President
George W. Bush's tax cuts were quick to employ Katrina. "This is a
hell of a time to be thinking of cutting taxes, especially on stock
dividends and capital gains,'' said Rep Charles Rangel (D-NY),
ranking member on the House Ways and Means Committee.[2]

The anti-tax cut
message is not just about fiscal deficits. Rather than see Katrina
as an act of nature, some pundits shamelessly blame the tax cuts
for "bloated corpses float[ing] down the boulevards of a historic
city."[3]

How would repeal
of the 2003 tax cuts affect the national economy? Americans know
the storm's economic impact was severe just by its impact on
gasoline prices, but the main concern now is about jobs. Recent
measures show that new jobless claims spiked to 398,000 following
the hurricane-an increase of 22 percent in just one week.

Economists are
uncertain about the severity of Katrina's damage on the economy.
New Orleans is a vital port and transportation hub, and it was a
center for oil refining. Fortunately, New Orleans is not entirely
destroyed, and many areas will be back in business in weeks, not
months. Nationally, however, the fundamental reduction of aggregate
supply, mixed with government-back increase in aggregate demand
means that generally higher inflation over the next year is a sure
thing. In terms of employment, the migration of people is more
likely to create a boom than a burden in cities where those
displaced from the Gulf Coast settle-consider, for example, the
prospect of a hundred thousand new customers on restaurants in
Texas.

A Choice: To
Contract or Expand?

The enduring
lesson of the Great Depression is that economic policy should not
be contractionary in the face of a contraction. That fundamental
rule is adhered to by neoclassical economists and is also one of
the sacred commandments of Keynesians-a rare point of agreement
between the two groups. So it was rather bizarre, and likely driven
by partisanship more than economic thinking, to hear Sen. Hillary
Clinton (D-NY) say that "...[rebuilding New Orleans] comes from the
first instance in not making those tax cuts for rich people like us
permanent."[4]

The Heritage
Foundation projected that the passage of the Jobs and Growth Tax Relief Reconciliation Act
(JGTRRA) of 2003 would create millions of additional jobs above and
beyond what the economy would generate normally. These projections
were driven by the strong expansionary components of the
bill.

JGTRRA accelerated the phase-in of incentives
to work and invest from the President's 2001 tax cuts, while also
providing major new incentives:

Lower tax rates on personal income for all taxpayers. The
top marginal tax rate was reduced from 39.6 percent to 35 percent,
and a 10-percent bracket was introduced.

Lower taxes on business investment, including a much lower
tax rate, 15 percent, on dividends and on long-term capital gains.
Equally important, JGTRRA allowed businesses to more quickly deduct
the expenses of their investments in machinery, computers, and
software.

An increased child tax credit, from $500 to $1,000 per
child.

The end of the marriage penalty. Married couples no longer
pay higher taxes than equivalent singles, which eliminates a
perverse incentive against families.

A phased-in repeal of the estate tax.

In fact, five million more Americans were
employed in August 2005 than in May 2003, when President
George W. Bush signed the tax cuts into law. Recoveries normally
create jobs anyway, but lower taxes increased incentives to work
and incentives to hire more workers.

Making the Bush
tax cuts permanent would create 430,000 additional jobs nationally
in 2006 alone and an average of 624,000 per year over the next
decade, according to our macroeconomic modeling. These numbers
include 5,300 additional jobs in Mississippi and 9,100 additional
jobs in Louisiana annually-one-third of those in New Orleans-just
due to making the tax cuts permanent.

Congress now has a
very tough political decision: whether to make the 2003 tax cuts
permanent, to let them to phase out as scheduled, or to repeal them
promptly in order to help "pay for" Katrina. There is an
alternative to taxing more, and that is spending less. It may be
tough politically, but re-prioritizing spending and limiting its
future growth is the only way to change fiscal policy without
harming the economy. Spending discipline is the path to making tax
cuts permanent and creating more jobs.